A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

“Shiller’s Book Was a Best-Seller. There Have to Be Hundreds of Thousands of People Who Have Read It and Find Value in It. So at the Starting Point There Is Zero Problem Getting People Interested in or Convinced of the Merit of the Ideas. The Problem Comes With Developing the Ideas. My Project Is to DEVELOP Shiller’s Revolutionary Insight That Valuations Affect Long-Term Returns. The Buy-and-Holders Want to Continue the Cover-Up. I Want to Expose It.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

I am not sure why you need all these other people to lead with ‘your’ ideas. Can’t you figure out how to drive support yourself? Not phantom ‘thousands’ of make believe people. Real, actual, people.

Shiller’s book was a best-seller. I don’t know how many copies it sold. But it is carried in just about every library of consequence in the nation. So there have to be hundreds of thousands of people who have read it and who find value in it. These people carry these ideas around in their head every day and everywhere they go. So at the starting point there is zero problem getting people interested in or convinced of the merit of the ideas.

The problem comes with developing the ideas. Shiller’s core point is a simple one — Valuations matter. If you asked people whether they agree that valuations matter, you would get millions who would say “yes.” Even most Buy-and-Holders would say “yes” to that. I was a Buy-and-Holder once upon a time. I would have said “yes” if I was asked “Do valuations matter?” Why did I remain a Buy-and-Holder if I rejected the core premise of Buy-and-Hold (that stock market returns play out in the pattern of a random walk, that valuations do NOT matter)? Was I stupid?

I wasn’t stupid. I hadn’t thought through the implications of the idea that valuations matter. The idea that valuations matter and the idea that market returns play out in the pattern of a random walk contradict each other — it’s a logical impossibility that both are so. So the collection of beliefs about how stock investing works that I held in my head at that time was logically inconsistent. It would have been fair to have said that in an overall sense my understanding of how stock investing works was “stupid.” The softer and more accurate way of saying things would have been to say that I hadn’t thought things through, that I failed to examine my collection of beliefs for inconsistencies.

We advance as a people in our understanding of how the world works by DEVELOPING the ideas that we hold. My project is to DEVELOP Shiller’s “revolutionary” (his word) insight that valuations affect long-term returns. I’ve done a lot of that over the past 14 years and I intend to do a whole lot more of it in the remaining years of my life. But it is obviously not going to be just me doing that. Shiller will be further developing his insight. And Pfau will be developing Shiller’s insight. And John Walter Russell developed Shiller’s insight in many significant ways. And Arnott developed Shiller’s insight in important ways. We all should be doing that. Shiller’s core insight is a gold mine. It is the most important insight in the history of investing analysis by a long shot. It will take many decades for us to fully develop that powerful insight.

Does that answer your question, Laugh? Its not just me who needs what I am seeking to obtain. We all need it. We all are in the same boat. We live under an economic system that cannot survive unless we find some means to get accurate and honest information about how to finance a retirement out to millions of people who work for a living. Many years ago the Buy-and-Holders made a mistake about how that should be done. They were embarrassed when the mistake was uncovered by the peer-reviewed research. They went into cover-up mode and now, 35 years later, the cover-up continues. They cannot bear to have people learn the realities of how stock investing works but the economic system that serves all of us will collapse unless the cover-up ends. We all desperately want and need the same thing, a complete and total good. But the Buy-and-Holders cannot bear to face the shame they will need to endure when the cover-up is exposed.

What I need is for the cover-up to be exposed. It’s the same thing you need. It’s the same thing that every last person on the planet needs. We need to advance human knowledge of how stock investing works. It’s all upside, zero possible downside. But the Buy-and-Holders are worried that they will go to prison if people learn the realities or that they will be sued for not telling their clients the truth or that they will be embarrassed for not themselves having explored the realities for 35 years. That’s the resistance. That is what is holding us back. It’s that cover-up that caused the economic crisis.

The Buy-and-Holders want to continue the cover-up. I want to expose the cover-up. That’s the conflict. It’s weird. It’s strange. But it’s not complicated. They made a mistake. They are ashamed. So they want to shut people up. I love my country. So I want to see the people who live in it thrive. This is an easy way to improve people’s lives in a very dramatic way, to make it possible for them to retire many years sooner and to invest in stocks with much less risk. Why would any sane person not want that? If the Buy-and-Holders had never engaged in a cover-up, they would want it too. Bogle wants what I want. Had Bogle known in 1981 where his cover-up was going to take us, he never would have engaged in it. Bogle and I want the same thing. We are soul-mates who ended up on different sides of an important question because we faced different circumstances in our respective journeys through life.

I hope that I am being responsive to your question, Laugh. I have zero problem driving support for “my” ideas. 80 percent of the population is interested in learning the realities and loves finding opportunities to learn more. We have seen that since the morning of May 13, 2002. That’s precisely the problem from the standpoint of you Goons. If there weren’t such an intense demand to learn more among the general population of investors, you Goons would never have engaged in such insanely abusive tactics to block people from learning what they need and want to learn. 35 years down the road, the Buy-and-Holders are desperate. My life happened to play out in a way that I felt the brunt of that desperation being applied to me.

Once your prison sentence is announced, there won’t be any issue. No one is going to block anyone from talking about whatever they want to talk about once your prison sentence is announced. I mean, come on. There will still be Buy-and-Holders in the early days. There are millions of sincere Buy-and-Holders today. But there will be fewer and fewer of them as time goes no and as the discussions continue at hundreds of different places and as more and more implications of Shiller’s core insight are discovered and developed. It will just get better and better and better for every last one of us and there will be no “controversy” whatsoever about how we will all be working together to continue that process.

There has never been any legitimate controversy here. The problem going back to the morning of May 13, 2002, was the cover-up and the shame that you Buy-and-Holders felt over it. The cover-up had been in place for 21 years at that time. Greaney lied about the safe withdrawal rate. He knew it. He is too smart not to have known that his retirement study lacked an adjustment for the valuation level that applied on the day the retirement began. But of course on another level of consciousness he DIDN’T know. He saw all the experts ignoring this critical dimension of the problem and he convinced himself (in a tentative, uneasy, unconfident way) that it was okay for him too to ignore this dimension of the problem. When he was called out in it, he became enraged because he was embarrassed to be seen to have gotten so important a number so wildly wrong and annoyed that he had been called out for doing something that hundreds far more expert than he had done before him.

What I want to do is to develop the ideas. And to see thousands of others develop the ideas. I want our society to continue to advance in its knowledge, as it has for over two-hundred years now (longer than that if you include years before the American experiment in self-governance began). I want the world to continue on the path it has been on since the beginning of time, a path of discovering and taking advantage of new knowledge. If you were not in such pain about the mistake you made, you would want that too. You are happy to see advances in every other field of human endeavor. It is only in the investing field that you adopt this odd stance of being willing to fight to the death any advance in knowledge. You do that because it hurts you to see with numbers how much you have hurt yourself by falling for a Get Rich Quick scheme. It pains you to see that you are just like the Madoff investors, every bit as capable as they were of getting caught up in the emotion of stock investing and convincing yourself of things that cannot possibly be so (I of course did the same thing at one time).

That’s how I see things, in any event. I want what you want. But I am able to act on it. I am able to take steps to achieve my goals. You are trapped by your shame into fighting progress. If you weren’t so trapped, you wouldn’t have to ask these questions. It would be obvious to you why so many of us want to move forward in our understanding of how stock investing works. It’s not even a tiny bit hard to understand for anyone capable of thinking straight. You find it impossible to understand because you are filled to the brim with all of the negative emotions that follow once one becomes addicted to a pure Get Rich Quick approach.

I hope that in time you will be able to recover from your addiction. It is certainly my intent to help that process along whenever I have an opportunity to do so. I cannot force you to go somewhere that you don’t want to go. I respond to questions, that’s all. If they help, they help. If you cannot bear to hear the answers at this time, it might be that someone else will read these words that will find some benefit in hearing the words that I directed to you. You never know who is reading your words when you post them to the internet. I didn’t know that Wade Pfau was reading my words when I posted them to the Bogleheads Forum until he wrote me following the ban and asked to partner with me in preparing what I think it would be fair to describe as the most important research project in this field in the past three decades. I put the words out hoping that they would do some good and in time I saw a big payoff. That’s how it plays out over and over again. That’s why I write the words that I write for you here today.

My best and warmest wishes to you and yours, my old friend.

Rob

“I Tell People All the Time That I Could Be Wrong, That I Have Been Wrong Before and That, If It Were Happening Again, I Would in All Likelihood Be the Last to Know. Have You Ever Heard Jack Bogle Say Something Like That?”

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Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

Rob,

The only person I see reporting numbers wrong is you. You like to tell people that their net worth a will drop 65% yet you have no clue as to what they hold.

Secondly, you have never allowed me or anyone else to post any numbers on your website as you delete them. You never allow the debate to ever start.

So, as I have proposed many times, how about we both post our numbers, returns and strategies and let the results speak for themselves.

My response above stands, Sammy.

What numbers are right and what numbers are wrong depends on whether it is Shiller or Fama who really deserves the Nobel prize they were both given. One of the two got things terribly wrong and hurt a lot of people by doing so (unintentionally — but still).

I tell people all the time that I could be wrong, that I have been wrong before and that, if it were happening again, I would in all likelihood be the last to know.

Have you ever heard Jack Bogle say something like that?

Given Shiller’s Nobel Prize, I believe that Bogle should be putting forward that statement in every speech he gives and in every article he writes. If Shiller’s research is legitimate, Buy-and-Hold is dangerous.

It works the other way too. If Fama’s research is legitimate, Valuation-Informed Indexing is dangerous. The difference is that I say that all the time and I have never once heard Bogle say it. I think we all should be working together to urge Bogle to start saying that.

Rob

“Any Suggestion to Compare Portfolio Results of Buy-and-Holders and Valuation-Informed Indexers BEGS THE CORE QUESTION of Whether Valuations Matter or Not. If You Adjust for Valuations, You Get a Result that Favors Valuation-Informed Indexing. If You Fail to Adjust for Valuations, You Get a Result that Favors Buy-and-Hold. So You End Up Right Back at the Starting Point of Needing to Determine Whether Valuations Matter or Not.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

Yes, Rob. The first step in effective investing is saving enough money to invest. You keep repeating that retirements are failing due to using the wrong numbers, yet we all know it is primarily due to insufficient savings.

There is nothing intimidating in anything I post and you know it. Intimidation is best characterized by threats and we all see how you threaten people with prison threats.

I prefer to discuss facts. I prefer to compare results. I wish you would do the same. My suggestion is for you and I to discuss and compare our investing strategies and their results so that readers can compare. Are you ready to have this adult conversation?

I’m happy to discuss real-world results, Sammy, but only if you are willing to make valuation adjustments to your portfolio numbers. The error at the core of the Buy-and-Hold strategy is the claim that valuations don’t matter. If they do matter, everything the Buy-and-Holders say is wrong.

Buy-and-Hold is a numbers-based approach. To show how dangerous it is, we have to report the numbers accurately and compare the accurate numbers to the Buy-and-Hold numbers. The Buy-and-Holders get upset when we do this. Because there’s just no comparison. If valuations really do matter, as Shiller showed and as I believe, then Buy-and-Hold is INSANELY dangerous.

The point of this column entry is that everyone acknowledges that valuations matter but few are willing to QUANTIFY the effect. That’s what the Stock Predictor does. It doesn’t just make a vague statement that valuations matter. It works the numbers. It shows HOW MUCH valuations matter. When you look at the numbers, it’s pretty darn amazing how big the effect is.

The idea that valuations don’t matter at all (the Efficient Market Theory) is wrong (in my view!) but at least it is logically consistent. The idea that valuations matter a little is flat-out at odds with all of the historical data available to us. If you truly believe that valuations matter, you should be willing to examine the data to determine HOW MUCH they matter. Anyone who takes a serious look at the data is going to walk away frightened about what Buy-and-Hold is doing to us as a nation.

You take comfort in your portfolio numbers. But are they real? That’s the question on the table. Shiller showed that valuations affect long-term returns. If that’s so, the portfolio numbers that we all use to plan our financial futures are not real. There are the nominal numbers that most of us use for planning and there are the valuation-adjusted numbers, the numbers you get when you consider the level of investor emotion that permitted inflated numbers to prevail for a time.

I mean no personal offense but it is my contention (based on 35 years of peer-revirewed research) that you are living in a dream world. We have discussed this stuff thousands of times and every single time you refuse to adjust your portfolio numbers for the overvaluation that applied at the time the discussion was being held. It’s easy to beat a competing strategy when you use phony numbers. Use numbers consistent with what the last 35 years of peer-reviewed research shows about how stock investing really works and your portfolio results will go from looking decent next to mine to looking very poor indeed.

The short version of all this is that any suggestion to compare portfolio results of Buy-and-Holders and Valuation-Informed Indexers BEGS THE CORE QUESTION of whether valuations matter or not. If you adjust for valuations, you get a result that favors Valuation-Informed Indexing. If you fail to adjust for valuations, you get a result that favors Buy-and-Hold. So you end up right back at the starting point of needing to determine whether valuations matter or not. That’s the only question that really matters.

That’s why I make such a point of noting that Shiller’s 1981 findings “revolutionized” the field. Everything we once thought we knew about how stock investing works is wrong if Shiller is right. We all should be talking about this. We should have launched a national debate re these questions 35 years ago, in my view.

Please take good care.

Rob

Sam Parler to Rob: “For the First Time, I Am Witnessing in a Non-Bear Discussion Group, the Idea of Pulling in the Reins and Lightening Up on Stock Allocation.”

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Set forth below is the text of an e-mail sent to me on November 4, 2013, by Sam Parler, the co-developer of the Returns Sequence Reality Checker, following by my response to him:

Hey Rob,

I hope you are well and are having a good year. Hard to believe the holidays are nigh upon us.

I planted the seeds of your ideas at the discussion group of one of my investment newsletters [subscription, private unfortunately http://profitableinvesting.investorplace.com/forum ] a couple of months ago when the p/e10 hit 24-ish. At first I got a lot of dogmatic “timing cannot work” nonsense and was shouted down, but eventually, after I meekly posted links to your site, and to Wade Pfau’s studies, a few of the more thoughtful leaders at the forum came around from shouting me down to embracing the VII strategy. Now they have forgotten about me and my initial posts and are trying to take credit themselves. Kinda funny. One has posted additional links to passionsaving and another posted this link tonight:

http://www.marketwatch.com/story/you-really-can-time-the-stock-market-2013-11-04?pagenumber=1

For the most part, they are not being naive about this. They understand that the market could go another 20% or so higher, and that just because crashes have always occurred at this valuation level, it might not happen this time. For the first time, I am witnessing in a non-bear discussion group, the idea of pulling in the reins and lightening up on stock allocation.

Thought you would find this interesting; and hopefully, gratifying.

Take care,

Sam

Sam:

I find it VERY interesting and gratifying. Thanks much both for you efforts and for letting me know about them.

I don’t know about the traffic. I don’t think I check things carefully enough to know.

But that is not the important thing to me. The exciting news is that you are seeing people at a non-bear board respond to the message. I have seen similar signs. And the publication of that Market Watch article is also a sign.

Human psychology is strange. People often tell me that I am crazy to think that things are going to change  in the future. Their argument is that they never have before. My strongly held view is that that misses the point. All that it shows is that, when views do change, they will change very hard and very fast.

The doubts are INSIDE people. It’s not that people don’t have doubts. It is that they deny them. But seeing others not deny them breaks down their denial. So the change comes hard and fast when it comes.

It’s shameful that they are trying to take credit themselves. But I have seen this sort of thing myself. So it doesn’t shock me.

I recently gave a talk to a financial bloggers conference (FinCon13) titled “How to Become the Most Hated Blogger on the Internet.” It focused on the emotional side of all this. People weren’t jumping up and down. But they were listening. It gave me a scary sort of feeling that people are starting to take the message a bit more seriously.

Please let me know of any further development along these lines.

Rob

Jeff at The Sustainable Life Blog to Rob: “How Nice It Was Meeting You at FinCon in St. Louis. I Remember That We Chatted A Bit About You Being the Most Hated Guy on Investing Forums and About You Branding It As Well. I Think It’s So Funny That People Get So Angry at You.”

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Set forth below is the text of an e-mail sent to me by Jeff, the author of The Sustainable Life Blog, on October 25, 2013, followed by my response to him:

Hi Rob,

I just wanted to drop you a quick line and say how nice it was meeting you at fincon in St Louis this year. I don’t know about you, but I had such a great time hearing from all the speakers and meeting online friends (some for the first time).

It was great meeting you at Ignite Fincon and chatting with you about Value Index Investing. I thought it was really interesting, and I’d really like to know how you got started with Value Index Investing and what you enjoy most about it. I had such a great time meeting and talking to so many different people, I didn’t get much time to focus on the most interesting parts – like why they do what they do!

I remember that we chatted a bit about you being the most hated guy on investing forums and about you branding it as well. That was really great to hear about, and I think it’s so funny that people get so angry at you for those comments you left. Glad that you were basically proven right by the downturn though.

Please, don’t hesitate to email me if you’ve got any questions or need help with anything. I’ve been blogging for almost 5 years, and love to help out anyone that asks!

Once again, it was great meeting you..

Jeff

Jeff:

That’s super kind! Seeing your e-mail brought a nice measure of good cheer to my Saturday afternoon.

I got started with Valuation-Informed Indexing when I was putting together an early retirement plan in the late 1990s (I left corporate employment in August 2000 and our family of four has been living off our investments for the 13 years since). When you are handing in a resignation from a big-paycheck job (I was a Director at the Ernst & Young accounting firm), you need to be SURE that you have enough to make it on your own. So I investigated a concept called “Safe Withdrawal Rates.”

I discovered (ironically enough, I discovered this by reading John Bogle’s book — this is ironic because Bogle is the lead advocate of Buy-ad-Hold, the strategy that VII replaces) that the conventional SWR studies get the numbers wrong (they fail to consider the effect of valuations). I was posting daily at a Retire Early board at Motley Fool and a retired government engineer there named John Walter Russell became interested enough in what I was saying to spend the next eight years of his life researching questions related to VII. John did HUNDREDS of studies backing all this up and published them at his own site. John died a few years ago and the right to publish all his research passed to me.

At some point, I started posting at the Vanguard Diehards board at Morningstar.com. An academic researcher (Wade Pfau — he has a Ph.D. in Economics from Princeton) discovered my posts and wrote me to ask if I would be interested in doing some research with him. Our paper has been published in a peer-reviewed journal. I believe that it is the most important research published in this field in the past 30 years. It shows investors that simply by taking valuations into consideration when setting their stock allocations they can reduce the risk of stock investing by 70 percent. Once we reach a point where we can publicize these findings,  stocks will become essentially a risk-free investment class. This is a huge deal.

The thing that I like most about VII is not the investing benefits. I have made my living as a journalist pretty much my entire life (I was hired at Ernst & Young as a tax lobbyist because they learned about my work reporting on tax legislation on Capitol Hill — I also hold a law degree and a Masters in Tax Law). So I have a strong interest in public policy issues. VII is rooted in the research of Yale Economics Professor Robert Shiller (who won the Nobel prize a week or two ago). Shiller’s findings don’t just make stock investing a risk-free endeavor. They also have huge implications re stabilization of our economic system.

Shiller predicted the 2008 economic crisis in a book published in March 2000. Do you know how he did it?

Shiller’s research shows that EVERY economic crisis in U.S. history was caused by excessive stock valuations. There has never been a single exception. Take away excessive stock valuations and you take away economic crises and all the huge increase in unemployment that always follows from them. Shiller’s work has the greatest potential for easing human suffering of any research being done today. What he has found (and what I have been writing about for 11 years) is the financial sector equivalent of the cure for cancer.

How do we stop stocks from becoming overpriced? It is amazingly easy.

I have a calculator at my site called “The Stock-Return Predictor.” It applies a regression analysis to the 140 years of historical return data to reveal the most likely annualized 10-year return for stock purchases made at any possible price level. It shows that the claim you always hear from Wall Street that “you can’t time the market!” is 100 percent false marketing mumbo jumbo. It has ALWAYS been possible and easy and necessary to time the market.
There is a hyper-technical way in which what they say is so. It is NOT possible to engage in short-term market timing (guessing where stock prices will be in a year or so) effectively. However, it is VERY easy to engage in LONG-TERM market timing. You can know today (with a high but not perfect level of
accuracy) where stock prices will be 10 years from today. Using the calculator, you can know when stocks are worth buying and when they are not.  This permits you to retire as much as 10 years sooner than you ever before imagined possible.

The Stock-Return Predictor reveals the price tag of stocks. Middle-class people who don’t practice long-term timing are essentially making the most important purchase of their lives (we spend more in the course of a lifetime on stocks than we do on clothes or food or housing or cars) without knowing the price! It’s insane. Why do they do it? Every industry that exists would love to have its customers believe that its product is a good buy at any possible price. The Stock-Selling Industry is the only industry that has ever been able to persuade its customers that this is actually so. They get away with it because most investors are intimidated by the subject of investing. They defer to experts. And the experts in this field get paid depending on how effective they are in persuading people to buy stocks. The conflict overwhelms most people’s sense of right and wrong and they rationalize saying all sorts of things that have long been shown to be nonsense by the peer-reviewed academic research.

Once people understand that stocks are not worth buying at high prices, guess what happens? That makes it impossible for high prices ever to be seen again. As prices go up, people sell shares. The sales of the shares pull price down again. If they go too low, people start buying more and that pushes prices up again. Stock prices are self-regulating. So long as people are told about the research!

The trick today is getting the word out about what the research really says. Most of the people who work in this field have built careers around promotion of Buy-and-Hold. There are lots of powerful and wealthy people who very, very much do not want middle-class people to learn about Shiller’s research and its implications. So we face heavy resistance.

But things have changed in a big way since the crash. I couldn’t get a guest blog published anywhere on the internet in the old days. Today there are lots of blogs that welcome me. Shiller’s research shows that there will be another crash in a year or two. I believe that the gates will swing wide open then.

You probably know that many blogs have been hit hard by Google. I believe that VII is going to prove to be the salvation of the Personal Finance Blogosphere. Bloggers are not as beholden to the industry big shots as are most others in this field. We are at least capable of independence. If we can get a small group of independent bloggers writing about these ideas, they will spread and spread and eventually gain recognition everywhere. I have spoken with LOTS of people over these 11 years. Lots of the big names in this field want to feel free to tell their readers and clients what really works in the long run. But they are afraid. They need cover. The more people who speak the truth openly, the less afraid all the others who want to do so feel. So this thing will gain momentum fast once we get the fire started.

Please come back to me and ask questions about this at any time. My site is today the only site on the internet that explores the implications of Shiller’s research in an in-depth way. There is room for hundreds of blogs doing this kind of work. And we would be helping millions of middle-class people by doing it. VII is safe, smart, simple investing. I have had THOUSANDS of people encourage me to pursue this quest. People need this. They need it badly. And the demand is going to go through the roof following the next crash, which is likely coming= in not too long a time.

I hope that helps a bit.

Thanks again for your exceedingly king and encouraging note.

Rob

Valuation-Informed Indexing #300: The Bad Side of Bull Markets

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I’ve posted Entry #300 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Bad Side of Bull Markets.

Juicy Excerpt: Imagine two investors who starts with a portfolio value of $10,000 and then add $10,000 in contributions for every year of a 30-year returns sequence. Say that one of the investors experiences 10 percent gains for each of the first ten years of the 30-year sequence and that the other investor experiences 10 percent losses for each of the first 10 years of the 30-year sequence. The return sequence beginning with 10 years of gains produces a closing balance of $796,051. The returns sequence beginning with ten years of losses produces a closing balance of $2,435,295. Bear markets pay off big-time for long-term investors. You’ll be able to retire much sooner if only you are lucky enough not to live through a prolonged bull market like the one we saw come to an end in January 2000.

It turns out that the stock market works just like every other market that has ever come into existence. Price drops are good news. Price increases are bad news. Time periods in which we see one price increase after another for many years in a row (bull markets) are horrible setbacks for us all. It all works just the opposite from what the Buy-and-Holders have been saying for 50 years now.

“I Don’t Have the Same Level of Fight in Me That I Had in Me 14 Years Ago. I Have Taken a Huge Emotional Hit. In Other Circumstances, I Would Be Ashamed. In These Circumstances, I Am Going to Give Myself a Break.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“I have several e-mails in my box this morning from people who came in through that link… I am going to write Barry and ask whether I can have any sort of ongoing relationship with the site. ”

So how did that all work out for you?

I don’t have an ongoing relationship with Barry today. But I believe that I will in days to come. So I would say that it has not worked out well thus far but I remain optimistic that it will work out very well in days to come.

It’s hard to stand up to the abuse from you Goons and to the indifference to it that we see from most Normals. That’s why we are in an economic crisis today. I am not the only person who is aware of Shiller’s “revolutionary” research findings from 1981. Lots of people know about them. Lots of people would be willing and happy to share their thoughts about them if they did not worry about seeing their loved ones threatened and their careers destroyed. That’s just human nature.

I try hard to tune that stuff out. I believe in posting honestly. And I have achieved amazing results on the content side by continuing to post honestly despite the insane levels of abuse that you Goons have directed at me. So I feel that my inclinations have been validated. I have achieved things that it would not be remotely possible for someone like me to achieve if lots of others were posting honestly and developing all of these powerful insights before I could get to them.

So I feel good about the path that I have taken while obviously not feeling at all good about the results that we have achieved together over the first 14 years of our discussions about the realities of stock investing. We are on the right track. We are one step away from entering the greatest period of economic growth in U.S. history. But today’s reality is that millions have lost their jobs as a result of the Buy-and-Hold Crisis. Millions are even beginning to lose confidence in our political system as a result of this massive act of financial fraud, as we see in the election results in both parties.

The result of the negative stuff is that I do not have the same degree of intensity when it comes to doing things like following up with people like Barry. In the old days, I would have sent him an e-mail and then another and then another and I might well have eventually broken through and changed the world as a result. What happened instead is that I sent him a single e-mail and then dropped the effort. It might be that he was super busy that day and just couldn’t get to it and that I would have made a good connection had I tried a second time. My down spirits may have hurt me (and millions of others) in this case.

I’m not proud of it, Anonymous. I hate to acknowledge this about myself. But the reality is that I am not Superman. I am made of flesh and blood like everyone else. Shiller hasn’t pushed as hard as he should have pushed. Pfau hasn’t pushed as hard as he should have pushed. Bogle hasn’t pushed as hard as he should have pushed. Arnott hasn’t pushed as hard as he should have pushed. When John Walter Russell was around, he didn’t push as hard as he should have pushed.

We all care what our fellow humans think of us. The Buy-and-Holders are in great pain. They very, very much do not want to hear the realties. That affects the level of desire that those of us who understand at least some of the realities feel about sharing them. We all are missing out for the time-being on lots of exciting advances because some of us are addicted to a Get Rich Quick approach and some of us don’t have what it takes to push at full strength in the face of a massive wall of indifference and abuse.

Whachagonnado?

I love my country. I love my profession. I love the Wall Street Con Men. I love you Goons. I love the millions of middle-class investors whose lives are in the process of being destroyed. All of that remains the case. I have not given up. I have not given two seconds of consideration to the idea of giving up.

But I don’t have the same level of fight in me that I had in me 14 years ago or 10 years ago or five years ago. I just don’t. There’s no benefit in lying about it. Things are what they are. I have taken a huge emotional hit. I have fought on when lots of others were not able to fight on. But I have not fought on with the same level of intensity. It would not be entirely unfair to say that I have to at least some extent been compromised. Yuck! Yucky but true all the same.

Barry is a great guy. I am thrilled about the article he wrote and the link to my other article that he posted. I will always be grateful for that.

And I believe I will have a close ongoing relationship with him in days to come.

In the time since I made that promise, I have done little to fulfill it. I did write one e-mail. I didn’t do nothing. But I didn’t do enough to get the job done. In other circumstances I would be ashamed to say that I did not follow through effectively. In these circumstances, I am going to give myself a break. I have done more than anyone else for 14 years running. I need to save up some energy for what still might be a hard fight to come following the next price crash. So I am going to go easy on myself for the time-being.

I will be sending more e-mails to Barry and to lots and lots of others following the next price crash or perhaps even a bit before that. That’s my pledge to you and to the millions of middle-class investors whose lives are in the process of being destroyed by this massive act of financial fraud. We will get to the place where deep in our hearts we all very much want to be. I will do my part and then some more on top of that and then even some more on top of that.

But it probably won’t be today that I will do that. It probably won’t be tomorrow either. I need a bit of a rest. I am human too.

I will be back fighting at full strength soon.

I hope.

We will have to wait and see how things play out.

My intent is to be back at full strength in the not-too-distant future.

I know that my Goon friends would want and expect no less!

Hang in there, Anonymous. Wish me luck!

Rob

Valuation-Informed Indexing #299: Shiller Showed That Valuations Matter, the Return Predictor Shows How Much They Matter

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I’ve posted Entry #299 to my weekly Valuation-Informed Indexing column at the Value Walk site, It’s called Shiller Showed That Valuations Matter, the Return Predictor Shows How Much They Matter.

Juicy Excerpt: After two months. Larry called me and we talked for several hours about the good that this new investing model (rooted in Robert Shiller’s research) could do for the world. The following day he sent me an e-mail containing the words quoted above. Larry put Valuation-Informed Indexing concept to the test and a skeptic became a believer. It happened the same way with me (I was once an enthusiastic Buy-and-Holder). And with John Walter Russell. And with Wade Pfau. And with scores of others.

I would like to see it happen with millions of others. But that hasn’t happened yet by a long shot. So I often ask myself what it is that people need to hear to bring them around. I believe that the answer is — they need to work the numbers. The research-backed finding that exercising price discipline when buying stocks can reduce risk by 70 percent is a highly counter-intuitive reality. People find it impossible to believe until they see the numbers for themselves.

“If We Can Get a Small Group of Independent Bloggers Writing About These Ideas, They Will Spread. Lots of the Big Names in This Field Want to Feel Free to Tell Their Clients What Really Works. But They Are Afraid. They Need Cover. The More People Who Speak the Truth Openly, the Less Afraid All the Others Who Want To Do So Feel. So This Thing Will Gain Momentum Fast Once We Get the Fire Started.”

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Set forth below is the text of correspondence that I engaged in with Jeff, owner of the Sustainable Life Blog, on October 6, 2013:

Hi Rob,

I just wanted to drop you a quick line and say how nice it was meeting you at fincon in St Louis this year. I don’t know about you, but I had such a great time hearing from all the speakers and meeting online friends (some for the first time).

It was great meeting you at Ignite Fincon and chatting with you about Value Index Investing. I thought it was really interesting, and I’d really like to know how you got started with Value Index Investing and what you enjoy most about it. I had such a great time meeting and talking to so many different people, I didn’t get much time to focus on the most interesting parts – like why they do what they do!

I remember that we chatted a bit about being the most hated guy on investing forums and branding it as well. That was really great to hear about, and I think it’s so funny that people get so angry at you for those comments you left. Glad that you were basically proven right by the downturn though.

Please, don’t hesitate to email me if you’ve got any questions or need help with anything. I’ve been blogging for almost 5 years, and love to help out anyone that asks!

Once again, it was great meeting you..

Jeff

Jeff:

That’s super kind! Seeing your e-mail brought a nice measure of good cheer to my Saturday afternoon.

I got started with Valuation-Informed Indexing when I was putting together an early retirement plan in the late 1990s (I left corporate employment in August 2000 and our family of four has been living off our investments for the 13 years since). When you are handing in a resignation from a big-paycheck job (I was a Director at the Ernst & Young accounting firm), you need to be SURE that you have enough to make it on your own.  So I investigated a concept called “Safe Withdrawal Rates.”

I discovered (ironically enough, I discovered this by reading John Bogle’s book — this is ironic because Bogle is the lead advocate of Buy-ad-Hold, the strategy that VII replaces) that the conventional SWR studies get the numbers wrong (they fail to consider the effect of valuations). I was posting daily at a Retire Early board at Motley Fool and a retired government engineer there named John Walter Russell became interested enough in what I was saying to spend the next eight years of his life researching questions related to VII. John did HUNDREDS of studies backing all this up and published them at his own site. John died a few years ago and the right to publish all his research passed to me.

At some point, I started posting at the Vanguard Diehards board at Morningstar.com. An academic researcher (Wade Pfau — he has a Ph.D. in Economics from Princeton) discovered my posts and wrote me to ask if I would be interested in doing some research with him. Our paper has been published in a peer-reviewed journal. I believe that it is the most important research published in this field in the past 30 years. It shows investors that simply by taking valuations into consideration when setting their stock allocations they can reduce the risk of stock investing by 70 percent. Once we reach a point where we can publicize these findings,  stocks will become essentially a risk-free investment class. This is a huge deal.

The thing that I like most about VII is not the investing benefits. I have made my living as a journalist pretty much my entire life (I was hired at Ernst & Young as a tax lobbyist because they learned about my work reporting on tax legislation on Capitol Hill — I also hold a law degree and a Masters in Tax Law). So I have a strong interest in public policy issues. VII is rooted in the research of Yale Economics Professor Robert Shiller (who won the Nobel prize a week or two ago). Shiller’s findings don’t just make stock investing a risk-free endeavor. They also have huge implications re stabilization of our economic system.

Shiller predicted the 2008 economic crisis in a book published in March 2000. Do you know how he did it?

Shiller’s research shows that EVERY economic crisis in U.S. history was caused by excessive stock valuations. There has never been a single exception. Take away excessive stock valuations and you take away economic crises and all the huge increase in unemployment that always follows from them. Shiller’s work has the greatest potential for easing human suffering of any research being done today. What he has found (and what I have been writing about for 11 years) is the financial sector equivalent of the cure for cancer.

How do we stop stocks from becoming overpriced? It is amazingly easy.

I have a calculator at my site called “The Stock-Return Predictor.” It applies a regression analysis to the 140 years of historical return data to reveal the most likely annualized 10-year return for stock purchases made at any possible price level. It shows that the claim you always hear from Wall Street that “you can’t time the market!” is 100 percent false marketing mumbo jumbo. It has ALWAYS been possible and easy and necessary to time the market. There is a hyper-technical way in which what they say is so. It is NOT possible to engage in short-term market timing (guessing where stock prices will be in a year or so) effectively. However, it is VERY easy to engage in LONG-TERM market timing. You can know today (with a high but not perfect level of accuracy) where stock prices will be 10 years from today. Using the calculator, you can know when stocks are worth buying and when they are not. This permits you to retire as much as 10 years sooner than you ever before imagined possible.

The Stock-Return Predictor reveals the price tag of stocks. Middle-class people who don’t practice long-term timing are essentially making the most important purchase of their lives (we spend more in the course of a lifetime on stocks than we do on clothes or food or housing or cars) without knowing the price! It’s insane. Why do they do it? Every industry that exists would love to have its customers believe that its product is a good buy at any possible price. The Stock-Selling Industry is the only industry that has ever been able to persuade its customers that this is actually so. They get away with it because most investors are intimidated by the subject of investing. They defer to experts. And the experts in this field get paid depending on how effective they are in persuading people to buy stocks. The conflict overwhelms most people’s sense of right and wrong and they rationalize saying all sorts of things that have long been shown to be nonsense by the peer-reviewed academic research.

Once people understand that stocks are not worth buying at high prices, guess what happens? That makes it impossible for high prices ever to be seen again. As prices go up, people sell shares. The sales of the shares pull price down again. If they go too low, people start buying more and that pushes prices up again. Stock prices are self-regulating. So long as people are told about the research!

The trick today is getting the word out about what the research really says. Most of the people who work in this field have built careers around promotion of Buy-and-Hold. There are lots of powerful and wealthy people who very, very much do not want middle-class people to learn about Shiller’s research and its implications. So we face heavy resistance.

But things have changed in a big way since the crash. I couldn’t get a guest blog published anywhere on the internet in the old days. Today there are lots of blogs that welcome me. Shiller’s research shows that there will be another crash in a year or two. I believe that the gates will swing wide open then.

You probably know that many blogs have been hit hard by Google. I believe that VII is going to prove to be the salvation of the Personal Finance Blogosphere. Bloggers are not as beholden to the industry big shots as are most others in this field. We are at least capable of independence. If we can get a small group of independent bloggers writing about these ideas, they will spread and spread and eventually gain recognition everywhere. I have spoken with LOTS of people over these 11 years. Lots of the big names in this field want to feel free to tell their readers and clients what really works in the long run. But they are afraid. They need cover. The more people who speak the truth openly, the less afraid all the others who want to do so feel. So this thing will gain momentum fast once we get the fire started.

Please come back to me and ask questions about this at any time. My site is today the only site on the internet that explores the implications of Shiller’s research in an in-depth way. There is room for hundreds of blogs doing this kind of work. And we would be helping millions of middle-class people by doing it. VII is safe, smart, simple investing. I have had THOUSANDS of people encourage me to pursue this quest. People need this. They need it badly. And the demand is going to go through the roof following the next crash, which is likely coming in not too long a time.

I hope that helps a bit.

Thanks again for your exceedingly king and encouraging note.

Rob

“These People Did Not Wake Up One Morning Thinking “Gee, Wouldn’t It Be Nice If I Could Come Up With a Way to Bring the U.S. Economy To its Knees?” They LIVE in the U.S. Economy. They Want It To Succeed. They Are Blinded By Their Pride. They Are Suffering Cognitive Dissonance. They Have Devoted So Much Energy and Time to This Failed Idea That They Cannot Bear to Hear the Truth About It. That Ain’t Saintly Behavior. But It Ain’t Monster Behavior Either. It’s Flawed Human Behavior.”

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Yesterday’s blog entry reported on my correspondence with Kevin, owner of the Out of Your Rut blog. Set forth below is follow-up correspondence:

Kevin:

Thanks much for your response.

I agree with most of what you say.

I obviously don’t agree with the part about backing down until the worm turns. There are three reasons. One, learning is a building block process. I learn by exploring things and talking things over. I have learned AMAZING things over the past 11 years that I would not have learned had I not been fighting the good fight (always in a fair way, I hope).

Two, one gains credibility by speaking out BEFORE the crash. I don’t want people seeing me as a sunny-day solider willing to get involved on their behalf only after they suffer devastating losses.

And, three, I just don’t have the heart to keep it zipped. Too many people are suffering. I don’t want to come across as a martyr. But I have run into lots of people who are suffering in serious ways. This includes big names in this field who very much want to be doing good and honest work and don’t feel free to do so today. That’s just too sad and too horrible.

The Goons ARE significant. And fraud IS keeping systems afloat. And powerful people DO have a vested interest in keeping it going. I don’t mean to be glib, but what else is new?

Powerful people had a vested interest in keeping slavery going once upon a time. Powerful people had a vested interest in keeping people from learning that smoking causes cancer once upon a time. Powerful people had a vested interest in covering up what was going on in the Penn State football program. All of those cover-ups were exposed because good people worked up the courage to speak up. That’s part of the JOB of a blogger., in my assessment.

The powerful people you refer to do not want to see the Second Great Depression. How the heck does that help them? Buy-and-Hold started out as something good and real. It got off track. Those people do not today possess what it takes to get it back on track. They need a little push from outside.

This is what I truly believe. I am not anti-Bogle, as the Goons assert. I am Bogle’s best friend in the world. I am helping him realize his vision, with him kicking and screaming every step of the way. The guy has done some amazingly wonderful things in his life. He has ALSO screwed up big time re the issue of valuations. Does that make him all bad? It does not. I personally do not believe in the cynical take any more than I do in the head-in-the-sand take. People are people. We are all flawed. The Buy-and-Hold Pioneers are flawed humans, not monsters and not saints.

Did you know that I learned about the errors in the Old School safe withdrawal rate studies by reading John Bogle’s book? That’s a fact. HE started all this. He wouldn’t have put that passage in his book if he was a monster seeking ONLY to cover up. He HELPED me. I can say the same about Bill Bernstein and Larry Swedroe and Scott Burns and lots and lots of others.

They ARE flawed. They HAVE made mistakes. I say that all the time. I am famous for it. But these people did not wake up one morning thinking “Gee, wouldn’t it be nice if I could come up with a way to bring the U.S. economy to its knees?” They LIVE in the U.S. economy. They want it to succeed. They are blinded by their pride. They are suffering cognitive dissonance. They have devoted so much energy and time to this failed idea that they cannot bear to hear the truth about it. That ain’t saintly behavior. But it ain’t monster behavior either. It’s flawed human behavior.

I obviously do not mean to single you out in any way, shape or form. I of course understand that you have done more than 99 percent of the bloggers out there. I am thinking out loud. I am always trying to come to grips with why people don’t act when there is so much good to be done by doing so and so much to lose by failing to do so.

I don’t think the Fed is covered in glory either. But the Fed is a political institution. It is the Fed’s JOB to stop a deepening of the economic crisis. So it is doing what it can. We all know that the Fed can only perform stopgap measures. But educating people about the last 32 years of peer-reviewed research is NOT a stopgap measure. That is something with real and long-lasting benefits. What millions of investors understand is far more important than what the Fed does or does not do. I mean no disrespect but I view blaming the Fed as a way of getting ourselves off the hook for OUR role (I include myself in that — I was afraid to tell my fellow community members what I knew about safe withdrawal rates prior to May 13, 2002.)

I of course agree that the aim of the Goons is not to debate but to discredit. But I think it is important to keep in mind that they hurt themselves each time they hurt others. The Goons are in the process of seeing their retirement plans destroyed just like all the rest of us. They know not what they do, you know?

My view is that the hard part of giving sound investing advice is understanding the Goon within all of us. We ALL have a Get Rich Quick impulse, the Goons are just more obvious about it. I talk to them because I care about them and because I want to learn from them and use what I learn to help them and others. I ALWAYS let the Goons know that I oppose the abusive garbage. So it is not that I am afraid to say that. I of course find dealing with them to be an intensely unpleasant experience. I do it because I need to know as much as possible about the Get Rich Quick impulse to be able to do effective work helping millions of others understand the true risks of stock investing. The Goons represent the dark side of all of us magnified by a factor of 20. We become good investors not by ignoring that dark side but by learning enough about it to overcome it.

A doctor cuts into human flesh to remove cancerous tissue.. It’s a messy and ugly business. But his purpose is a positive and constructive and life-affirming one. That’s the spirit in which I interact with the Goons. I don’t intend to let them pull me down into their darkness. I intend to lift them up to the light. I intend to make them more effective investors, no matter how much they resist the idea. If they refuse, I can use what I learned from my dealings with them to help millions of others with less serious pride and denial issues.

I really don’t think that anything is going to happen to people who stand up. Say that the Wall Street Con Men sue me. That runs the risk of bringing more attention to my site, does it not? That’s the last thing in the world they want to see.

The Goons have been threatening to have their Wall Street Con Men pals sue me for years now but they never file papers. I don’t think they dare to do it. Buy-and-Hold is dying. It has been dying for a long,
long time now. There were things that they once could do that they cannot do today. This is one of those cases where the only thing there is to fear is fear itself. They beat us because we so fear them that we don’t stand up to them. Once a group of 10 of us stands up to them, the bullies will run away in tears. I’ve talked to lots of people about this stuff. I don’t have 10 willing to go public today. But I think I am getting close.

Yes, people will listen after the next crash. But we are not going to have much time to fix things at that point. We need to be preparing now. And the best thing for every single person involved (including the Goons and the Con Men) is if we AVOID that crash. We will never drop below fair-value if the truth gets out. If we fall to one-half of fair value, as we have after every earlier bull market, it will be because people are still trying to believe in Buy-and-Hold and becoming depressed to see it not working. Illusions are dangerous. The difference between falling to fair value and falling to one-half of fair value might be the difference between going into the Second Great Depression and avoiding the Second Great Depression.

Thanks for caring enough to engage in a little back and forth. I of course get it that your heart is 100 percent in the right place. I wish I knew more like you. I could change the world in a very, very positive way if I did.

You’re one of the good guy’s, Kevin. Hang in there. We need more good guys running around this big old goofy planet of ours.

Rob